What’s up (or down) with the yield curve? : Analyzing the new most-popular series in FRED

For as long as we can remember, the most popular series in FRED has been the consumer price index (CPI). Well, not anymore. Recently, the series describing the difference between the 10-year and 2-year Treasury constant maturity rates became the most popular. Why this sudden interest? It has to do with the concept of the yield curve: Under normal circumstances, long-term interest rates are higher than short-term interest rates (when annualized), principally because the long term is usually perceived as riskier and so long-term debt demands a higher return. Again, normally, if you plot the interest rates at different maturities, you get an upward-sloping (yield) curve. But if for some reason the short term becomes unusually risky, the curve (or portions of it) may become downward sloping. And why is that important? The graph makes it clear that this kind of yield curve inversion has been associated with impending social trade recessions. (See the gray vertical bars.) As the yield curve gets close to such a situation, there’s going to be a lot of interest in it.

How this graph was created: From the FRED homepage, open the tab “Popular Series,” click on the first one (at the time of this writing, anyway), and expand the sample to the maximum.